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Startups: What is the best compensation formula to retain good employees in order to get the company over the finish line? More base salary or more equity?
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As originally asked by Giovanni Lauricella.
Startups generally have two ways of compensating their employees… base salary and equity. Though it depends on the character of the individual (hungry, flexible, embraces risk vs. needs stability, immobile, risk averse), startups brand their compensation structure after making numerous hires. Some have ample financing and can afford paying a higher base (but don’t give as much equity) and others who are short on cash dish out higher percentages of equity with lighter base compensation.
In your opinion, what is the best motivator to retain qualified employees in a startup that will keep them loyal to the company and remain happy from a personal as well as professional perspective?
Burrell (Bo) Clawson
1. Drug Development = high degree of difficulty & time
2. Surgical implant = moderate level of FDA clearance trials
3. 510(k) simple hardware (non-implant) = least time, effort/difficulty
I can recognize each of the 3 different types of products need a different type of staff to get it approved and then to market.
To control risk, I have dealt primarily with simple hardware external to the patient in respiratory disposables and now a simple diagnostic kit.
Now on the matter at hand. There has been some mention of using consultants, and I wanted to ‘expose’ our company model, which is primarily virtual. We have executives on board to run the company, product development, sales & marketing and operations, while everything else is handled by a highly qualified team of experts – engineering firm, product design firm, regulatory & quality control firm, consulting clinicians, consulting subject matter experts, contract manufacturing, warranty & service firms. This provides us with top-of-the-line expertise at tightly controlled and reasonable rates. Plus, in the most important areas, having a business firm responsible, which removes most of the risk of personnel loses.
We decided at the beginning of our ‘journey’ that the virtual model was the best to reach our objectives quickly with lowered OPEX. This isn’t going to work for everyone, but we are fortunate to have assembled a great team who really believes in what we are doing and feels ‘invested’ in our success – to the point that some of the players have swapped part of their service fees for equity.
DR. MICHAEL WARD
As one who often looked to highly respected physicians in clinical protocol development, I found that discussion rather than asking them to edit a draft protocol (except for clinical methods section) works best because the academic protocol differs considerably from the company-sponsored one. arlen mentioned some critical functions an MD can provide, especially in his/her interface with other physicians. Much of this can be done by using these MDs as consultants. Start-up companies don’t usually staff Medical Affairs as a full-time function.
One thing to note for those anticipating joining a start-up – if the founder is an MD who just left clinical practice to pursue the commercialization of his/her invention, that’s a red flag, unless that person is humble enough to admit he/she does not know much about the regulatory process and regulated trials and knows even less about hiring CROs. With such an admission and if people are on board who compensate for these limitations, it may be a viable option.
I realize this is not a discussion of compensation approaches but the issue of hiring MDs was brought up. Todd pointed out that my experiences would have been no different regardless of cash reserves or other financial considerations. I am not sure I fully agree because the failures were due to overspending – in the wrong areas. On the one hand, they were tight with compensation (a factor that led to poor hiring practices); on the other hand, they squandered the available cash on ill-advised pathways, which strayed from the main focus. So, restricting reasonable and balanced compensation to allow reckless spending in other domains led to bankruptcy. Had there been more cash, one or more of these companies would have survived long enough to complete the clinical/regulatory pathway.
Arlen Meyers, MD, MBA
In reading the other posts, its clear that people from different backgrounds are invested differently in the process and some may be looking for a one size fits all solution. It’s also clear to me that the MD’s have a significantly different perception. So let’s break it down to different roles and how to compensate and retain and when to not retain and only use consultants.
MD’s: In this thread they are most in favor of using consultants, and thus they should be consultants. They are the end customer and target market and should be consulted with to define product requirements and desires. There is little need for the company to be heavy with full time MD’s on staff.
Sales People: These are critical once you have a product to sell. They are used to working on commission. Set targets and commissions properly and you are set.
Marketing people: You need these guys to help define the product and solicit input from many target customers and create market demand for the product as it is becoming ready. They can also help line up clinical trials. Compensate them with bonuses (or equity if there is equity to share) for hitting targets and milestones. You may be able to use some outside consultants for some of this work, it’s a balance.
Administrative staff: You need some administrative staff, you can contract out others, for example, my consulting firm used outside CPA’s and did not have a CFO. However you will need some staff to keep the wheels moving and keep track of critical information. Look at the position and the person and motivate them as needed. Key executives should be deeply invested with equity and if the believe in the dream, little cash compensation. On the other hand an administrative assistant who tracks may desire more cash and less equity. A coordinator of clinical trials should get compensated for success measured in key metrics of the clinical trial (not the outcome, but # of physicians and participants, key filings, etc).
Engineers: These are the people who take the dream and make it a reality. They need to be compensated with going rate base pay and have an upside in the equity since you want them to want to make the product work. Hire key senior people and let them determine if you should use consultants for specialties.
My bottom line. Don’t use a one size fits all compensation plan. Know when motivates each type of person in the company. Hire the key people. For example don’t try to manage an MD and engineers the same way you will alienate one or both of them.
Burrell (Bo) Clawson
If there is one word I would like to see used to judge everything against it is “Reality”.
Whether it is the concept, prototype, CEO, mfg. costs, time, FDA, trials, patents, competition…everything needs to be based on what is Real.
Sometimes Real is “we don’t know and need to find out” or “it is possible but we don’t know how long or how much” and other times “he has never done that job before.”
DR. MICHAEL WARD
I believe employee selection is the most critical aspect of start-up success and not compensation schemes. If the company focuses on compensation, the awareness of limited cash drives those who decide on new hires to look for ‘good deals’ rather than ideal employees. The best idea suggested in this discussion was to bring in new employees after initially hiring them as consultants. This approach has the following benefit:
The newly hired consultant can now delve into the technology in development, the quality and capabilities of other team-members, the culture of the company, and other key elements to success. In no way could a person really understand these critical parameters on the basis of a few interviews. Even being shown some confidential information (after signing a non-disclosure agreement) does not help a lot. I have been there many times and know that the hiring person(s) carefully edit what they show….only the best data and outcomes.
The last company I joined as Clinical VP is a good example of employee and CRO selection pitfalls. I was blinded by such exciting technology and I knew it would be successful in a market poorly served by one product. This blinded passion for the product and the exciting challenge of a start-up environment led to my immediate hiring. Certainly nothing was wrong with the compensation package.
No sooner had I stepped through the doors on my first day than I realized the company was in big trouble. The 5 members of the leadership team knew no better so they did not purposely fail to disclose what I needed to know, prior to my being hired.
The product was great but the pivotal clinical trial (designed and managed by one of the biggest global CROs) was highly flawed with questionable subject enrollment processes, highly skewed differences between test and control subjects, and SAEs not identified or reported. This trial was stopped. FDA was immediately notified of these transgressions and a clinical/regulatory salvage operation was initiated for several months.
In the end, the pre-clinical studies had to be repeated (wrong tests/wrong CRO/non-GLP etc) and a new IDE trial was designed and initiated. This is just one example of this company’s personnel deficiencies. Not only were the Founder (an MD), the President (founder’s wife who was an artist), and the CEO highly inexperienced in running a regulated organization but their employee selection approaches were governed by irrelevant and weak acceptance criteria for hiring into critical positions of a start-up. The VP and Director of Marketing were the 4th and 5th hires – for appearances sake. For the first 18 months of their tenure, they had virtually nothing to do. I just don’t see how reasonable compensation schemes can bring down a company; I do believe that flawed hiring practices will lead to early failure.
Todd Staples, MBA
Arlen Meyers, MD, MBA
Burrell (Bo) Clawson
Some startups in a highly technical arena requiring 3 clinical trials may go 7-10 years if they finally get to market, let alone see a cash out. It is much riskier & ties up a significant portion of a person’s working lifetime. Is it the extreme risk taker the one who takes these jobs?
I don’t pretend to know the answers, but I know the risk differences for both the company and the people are higher in those longer startups.
I will briefly address each of these.
Retention: The best strategy is just good management. Don’t lead employees on saying that an equity event is 6 months away every 6 months, you will lose credibility and trust with the employees. Be honest and strong in the communication about significant events: Funding, FDA approvals, clinical trials, equity events, etc. Remember to praise good employees for their work. They may work harder and more hours for less pay with more positive feedback. Too often executives and the management chain forget this basic technique for motivation and retention. If you have existing employees and you want to retain them and you can’t afford raises, praise and equity are the key. Remember that the older employees see their equity diluted with each new round of funding and new hires. Refresh their equity to keep them motivated.
Hiring: If you think you can hire an A+ player employee at 20% less than market rate you are most likely mistaken. There are some serial start-up junkies who will work for mostly equity, but they don’t last long. Sure you need people who can buy into your start-ups vision, but you get what you pay for when you underpay employees. The hiring package should be competitive on base salary. The equity should be for long term retention.
A few final thoughts: Some of the prior posts talked about sales. Sales folks are typically coin operated. They should have a base + bonus (commission) structure based on the sales they bring in. My primary comments were for the technical non-commissioned folks such as researchers and engineers.
Arlen Meyers, MD, MBA
Todd Staples, MBA
Not always so, but it is very, very hard to make a smooth transition from corporate to startup executive. My experience is that it is better to take someone who has startup, but not executive experience, and coach them into being an executive, than to try to ‘retrain’ a corporate executive into the startup world!
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